China scares away foreign investors who are key to the country’s big cities

Chinese President Xi Jinping (Jack Taylor/Pool Photo via AP, file) (Jack Taylor/)

The unpredictable chinese politics it deters foreign investment, which the country’s cash-strapped cities are desperate to attract.

Local officials are calling on foreign businessmen and organizing foreign tours to try to bolster coffers depleted by years of pandemic spending and a slumping housing market. They also face pressure from the central government to boost investment in what the Ministry of Commerce has dubbed the “Year of Investment in China”.

His efforts are being lukewarmly received by business communities outside of China. Although memorandums of understanding have been signed and some deals announced, many potential investors remain cautious about the country’s economic growth and wary of unexpected policy changes.

A coal mine in Shaanxi (REUTERS/Tingshu Wang/File Photo)
A coal mine in Shaanxi (REUTERS/Tingshu Wang/File Photo) (TINGSHU WANG/)

Investor appetite has been further weakened by the crackdown on foreign consultancies, trusted by international investors and multinationals to understand China. The campaign follows a series of abrupt regulatory tightenings in sectors ranging from technology to real estate that have sent foreign capital fleeing the country’s financial markets.

“There is no doubt that there has been a lot of pressure on these cities and provinces to attract investment, and this is the big contradiction: the policies that are being adopted at the central level are contrary to it,” said Noah Fraser, Director General of Canada China Business Council, who added that the Council has heard less and less about new investment. “Investor confidence is probably at an all time low.”

In recent months, dozens of Chinese provinces and cities have sent delegates to organize investment tours in countries like Singapore, Japan, France, Germany, as well as in Middle Eastern nations, according to local government statements and state media reports. Shanghai alone is planning at least 100 overseas visits this year to attract business, while the southern province of Guangdong wants to attract at least 2 trillion yuan ($288 billion) in foreign investment in the next five years.

However, companies are reluctant to increase their investments in China due to concerns such as a crackdown on foreign consultancies, according to a Macau-based travel company executive, who spoke on condition of anonymity due to the sensitivity of the matter. The executive recently met with officials from the northeastern city of Jilin, who were looking for partners to trade ginseng and deer antlers, as well as officials from Jiangsu province who were promoting the export of hairy crabs. Despite the talks, he has no immediate plans to venture to the mainland.

Foreign direct investment in China plummeted in the second half of last year, as corporate profits dwindled and the economy struggled due to Covid-zero lockdowns. Global investors have lost interest in Chinese equities, with the MSCI China Index down nearly 50% from its 2021 peak. Foreign holdings of Chinese bonds fell for 12 of the 13 months through February, before rising slightly in March.

The central district of Beijing (Bloomberg)
The central district of Beijing (Bloomberg)

In response, the Politburo – the highest decision-making body of the Communist Party – asked local governments last month to boost foreign investment in a context of weak domestic demand and difficult recovery.

Chinese local governments face a tough task. Its expenses rose 2.6% last year to defray the cost of Covid checks, tax cuts and other programmes, while revenue fell 11%, largely due to plummeting land sales caused by the real estate market crash. Debt costs are rising after borrowing to pay for infrastructure investments and fill budget gaps has increased in recent years. Bond interest amounted to $160 billion in 2022, 21% more than a year earlier.

Rising tensions with the West add to the challenge. Most US companies already investing in China have said the country is no longer one of their top three priorities, while the US government is trying to limit some investment flows to China.

Singapore has received delegations from Chinese cities almost every week this year, according to an official who spoke on condition of anonymity because he was not authorized to speak publicly. A Western Hong Kong businessman said officials have begun cold-calling foreign companies, skipping small talk and directly asking for investment, a tactic the person said was unusual before the pandemic. The businessman said they were being courted by a commerce official from a city in Shandong province.

However, interest is hard to find. The mayor of qingdaoport city of the province of shandong, held an event in Tokyo in April for more than 300 people. Several small Japanese companies signed memorandums of understanding at the end of the event, but no details of any deal or monetary investment were announced, with one attendee saying there is increasing reluctance to invest in China due to geopolitical tensions.

Although almost all Taiwanese business associations in mainland China have been asked to increase their investments this year, according to an official involved in cross-strait affairs, new investment by Taiwanese companies fell 10% in the first quarter and Taiwanese banks’ exposure to China fell to a record low in late March, according to government data.

Citizens line up to be tested for COVID in Guangzhou (Reuters)
Citizens line up to be tested for COVID in Guangzhou (Reuters) (STRINGER /)

An executive with a Hong Kong property developer said difficulties in conducting due diligence in China deter investors from buying assets on the mainland due to the risk of hidden debts. President Xi Jinping’s campaign against foreign due diligence companies will only exacerbate this concern.

Even investing companies are taking a prudent approach, preferring to focus on their own operations in China rather than direct cash investment, said Gary Lam, founder and chief executive officer of Asia CEO Community, a Hong Kong-based membership club. which focuses on growing a network of business leaders.

“They want control of their companies because their trust in the Chinese government and their current business environment has been eroded by the multitude of government crackdowns and constantly changing policies,” Lam said.

(With information from Bloomberg)

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